5 Reasons Why Your Company Should Adopt ESOP
- Employee Stock Option Plan (ESOP) grants companies a wide range of benefits, including increased growth and productivity.
- ESOP gives companies a great way to reward their employees and incentivise excellent performance.
- ESOP helps companies conserve cash flow yet offer competitive compensation packages.
“Should my company introduce ESOP or not?” This is a common question we receive from startup founders across Southeast Asia, on Employee Stock Option Plan (ESOP).
Our answer is a resounding yes. When done correctly, ESOP is a powerful tool to supercharge growth, strengthen organizational performance, and create wealth for both founders and employees.
In this article, we share 5 reasons why your company should adopt ESOP, and some things you should consider along the way.
New to ESOP or need a quick refresher? Check out our simple guide here! A 5-minute guide to ESOP and why they matter.
1. ESOP enables ownership and motivates employees to go the extra mile
With ESOP, your employees’ compensation packages are not only limited to their monthly pay checks but are also intrinsically tied to the company’s growth and future.
When the company is successful, employees can obtain huge financial returns from increases in the company’s stock value, as well as the value of the ESOP. Therefore, it is in every employee’s interest to go the extra mile for the company.
Thus, ESOP empowers employees to think and act like owners. With an alignment of interests and financial benefits, employees will be motivated to give their best to the business.
2. ESOP builds a strong company culture
ESOP ensures that objectives and incentives are aligned between founders and employees.
With everyone owning a share of the company, founders and employees will work closely with one another to achieve one single objective – grow and scale the business. Employees will also be more willing to work cross-functionally and support their colleagues to do great work together.
All that creates a strong culture of shared responsibility and collaboration, where founders and employees work together towards positive growth.
3. ESOP helps your company attract and retain talents
A robust ESOP typically has a vesting period. A standard vesting period is across 4 years, with a 1-year cliff. This means an employee receives 0% vesting for the first 12 months, 25% vesting at the 12th month mark, and 1/36th (2.78%) additional vesting every month until the 48th month.
If an employee leaves within a year, they forfeit all share options as they have yet to reach the cliff date. But if an employee leaves after 3 years, they will receive 75% of their allocated share options.
Under such circumstances, most employees on an ESOP are motivated to stay with the company, until their ESOP has been vested. The stipulated vesting schedules further incentivize employees to commit long-term and grow with the company.
Moreover, founders can reward additional ESOP to employees with outstanding performances, granting additional incentive for them to stay with the company in the long term.
ESOP helps companies retain talents, minimize employee turnover, and ensure high levels of organizational commitment. These factors are especially key for early-stage companies, which need all committed hands on deck.
4. ESOP protects your company against uncooperative departing employees
It is inevitable that some employees will leave your company. Founders can build in good and bad leaver provisions in their ESOP, to compel departing employees to conduct proper handovers and maintain professional decorum.
Leaver provisions encourage departing employees to be ‘good leavers’, so that they will be able to retain their vested options. Conversely, founders can penalize ‘bad leavers’ by forfeiting some or all of their vested options.
With leaver provisions built in, ESOP protects your company by disincentivizing poor performance among departing employees.
5. ESOP helps your company conserve cash yet offer competitive compensation packages
Almost all startups have to manage limited cash flows, especially those in early stages of growth. Yet like all companies, startups need to attract talents to grow the business.
By offering ESOP, founders can make their compensation packages look competitive and attractive, in a way that does not impact current cash flows.
Founders can also use the cash conserved to invest in the business and create greater financial upsides.
So what now?
ESOP creates win-win outcomes for your company, the founding team, and your employees. When well executed, it is an excellent strategy for a company looking to strengthen organizational performance, attract and retain talents, and protect itself from uncooperative employee behaviour.
The team at Svested is keen to supercharge your startup’s growth with ESOP, and make ESOP easy and accessible for you.
Contact us at firstname.lastname@example.org to get support in your ESOP journey.
Disclaimer: All contents in the article are based on our own opinions and interpretations, and the reader agrees to discharge us of any liabilities for any error or omissions. Article is not meant to be legal or tax advice, but for informational purpose only.